Following consultation in the early part of this year, the FRC has published the 2018 UK Corporate Governance Code as well as its revised Guidance on Board Effectiveness. The FRC’s stated mission is to promote transparency and integrity in business. As the competent authority for audit in the UK, the FRC sets auditing and ethical standards and monitors and enforces audit quality.
The new Code focuses on the application of Principles. As previewed in our earlier article (LINK), the role of non-executive directors remains in view. The Code applies specifically to companies with a premium listing however, given the wide remit of the FRC, the Code will add context for best practice in corporate governance elsewhere.
FRC chairman Sir Win Bischoff has said: “Corporate governance in the UK is globally respected and is a framework trusted by investors when deciding where to allocate capital. To make sure the UK moves with the times, the new code considers economic and social issues and will help to guide the long-term success of UK businesses. This new code, in its new shorter and sharper form, and with its overarching theme of trust, is paramount in promoting transparency and integrity in business for society as a whole.”
Following the consultation, the main changes to the previous Code that relate to succession and diversity are:
- to ensure that the boards have the right mix of skills and experience, constructive challenge and to promote diversity, the new Code emphasises the need to refresh boards and undertake succession planning;
- boards should consider the length of term that chairs remain in post beyond nine years;
- the new Code strengthens the role of the nomination committee on succession planning and establishing a diverse board;
- the new Code identifies the importance of external board evaluation for all companies; and
- nomination committee reports should include details of the contact the external board evaluator has had with the board and individual directors.
The consultations have impacted on the new Code as follows:
- chair: chairs should be independent on appointment and should demonstrate objective judgement throughout their tenure;
- independence of NEDs: the board has a discretion to identify which NEDs it considers to be independent. The previous application of criteria to assess independence is not rendered irrelevant; where the criteria apply and the board considers that the NED remains independent, a clear explanation should be provided;
- effectiveness: all chairs should consider having a regular externally facilitated board evaluation; and
- transparency: where companies do have an external evaluation, the annual report should include a description of the nature and extent of the external evaluator’s contact with the board and directors.
The separate Guidance on Board Effectiveness places greater emphasis on NEDs engaging with all levels of the workforce, shareholders and customers to have a good understanding of the company and its business. In addition, NEDs should spend time in developing and refreshing their knowledge and skills.
There are plenty of other matters covered by the new Code and Guidance. The Financial Conduct Authority is reported to be reviewing its handbook in the light of the new Code and further guidance from the FRC as regards audit, risk, internal controls and reporting is expected.
Gavin Poole is a partner in the corporate team at Stephens Scown. If you have any queries about non-executive directors or any other corporate law query then please do contact Gavin on 01872 265100, or by email info@stephens-scown.co.uk